Banco Central de Chile Documentos de Trabajo. Central Bank of Chile Working Papers

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1 Banco Central de Chile Documentos de Trabajo Central Bank of Chile Working Papers N 406 Diciembre 2006 UNDER WHAT CONDITIONS CAN INFLATION TARGETING BE ADOPTED? THE EXPERIENCE OF EMERGING MARKETS Nicoletta Batini Douglas Laxton La serie de Documentos de Trabajo en versión PDF puede obtenerse gratis en la dirección electrónica: Existe la posibilidad de solicitar una copia impresa con un costo de $500 si es dentro de Chile y US$12 si es para fuera de Chile. Las solicitudes se pueden hacer por fax: (56-2) o a través de correo electrónico: Working Papers in PDF format can be downloaded free of charge from: Printed versions can be ordered individually for US$12 per copy (for orders inside Chile the charge is Ch$500.) Orders can be placed by fax: (56-2) or

2 BANCO CENTRAL DE CHILE CENTRAL BANK OF CHILE La serie Documentos de Trabajo es una publicación del Banco Central de Chile que divulga los trabajos de investigación económica realizados por profesionales de esta institución o encargados por ella a terceros. El objetivo de la serie es aportar al debate temas relevantes y presentar nuevos enfoques en el análisis de los mismos. La difusión de los Documentos de Trabajo sólo intenta facilitar el intercambio de ideas y dar a conocer investigaciones, con carácter preliminar, para su discusión y comentarios. La publicación de los Documentos de Trabajo no está sujeta a la aprobación previa de los miembros del Consejo del Banco Central de Chile. Tanto el contenido de los Documentos de Trabajo como también los análisis y conclusiones que de ellos se deriven, son de exclusiva responsabilidad de su o sus autores y no reflejan necesariamente la opinión del Banco Central de Chile o de sus Consejeros. The Working Papers series of the Central Bank of Chile disseminates economic research conducted by Central Bank staff or third parties under the sponsorship of the Bank. The purpose of the series is to contribute to the discussion of relevant issues and develop new analytical or empirical approaches in their analyses. The only aim of the Working Papers is to disseminate preliminary research for its discussion and comments. Publication of Working Papers is not subject to previous approval by the members of the Board of the Central Bank. The views and conclusions presented in the papers are exclusively those of the author(s) and do not necessarily reflect the position of the Central Bank of Chile or of the Board members. Documentos de Trabajo del Banco Central de Chile Working Papers of the Central Bank of Chile Agustinas 1180 Teléfono: (56-2) ; Fax: (56-2)

3 Documento de Trabajo Working Paper N 406 N 406 UNDER WHAT CONDITIONS CAN INFLATION TARGETING BE ADOPTED? THE EXPERIENCE OF EMERGING MARKETS Nicoletta Batini International Monetary Fund Douglas Laxton International Monetary Fund Resumen Aunque abundan los estudios sobre metas de inflación en países industriales, ha habido muy poco análisis de los efectos de las metas de inflación en las economías emergentes. Basado en una nueva y detallada encuesta a 31 bancos centrales, este artículo muestra que las metas de inflación en mercados emergentes traen beneficios significativos a los países que las adoptan en comparación con otras estrategias, tales como metas monetarias o cambiarias. En efecto, al comparar el desempeño de economías con metas de inflación con una muestra de países que aplican otros esquemas, los autores muestran que se logran mejoras sustanciales al anclar la inflación y las expectativas inflacionarias, sin por eso causar efectos adversos sobre el producto. Además, con las metas de inflación, las tasas de interés, el tipo de cambio y las reservas internacionales se hacen menos volátiles, y el riesgo de sufrir una crisis monetaria es menor que donde se siguen metas monetarias o cambiarias. Curiosamente, las metas de inflación parecen superar a los esquemas que fijan el tipo de cambio, incluso cuando la comparación considera solo aquellos que han tenido éxito. De la encuesta se deduce que no es necesario que los países cumplan con una serie de restricciones institucionales, técnicas o económicas para poder adoptar con éxito un régimen de metas de inflación. Abstract While there have been numerous studies of inflation targeting in industrial countries, there has been much less analysis of the effects of inflation targeting in emerging market countries. Based on a new and detailed survey of 31 central banks, this paper shows that inflation targeting in emerging-market countries brings significant benefits to the countries that adopt it relative to other strategies, such as money or exchange rate targeting. Indeed, by comparing the performance of the inflation-targeting countries with a sample of countries that pursue other regimes we show that there are significant improvements in anchoring both inflation and inflation expectations with no adverse effects on output. In addition, under inflation targeting interest rates, exchange rates, and international reserves are less volatile, and the risk of currency crises relative to money or exchange rate targets is smaller. Interestingly, IT seems to outperform exchange rate pegs even when only successful pegs are chosen in comparison. The survey evidence indicates that it is unnecessary for countries to meet a stringent set of institutional, technical, and economic preconditions for the successful adoption of inflation targeting. Paper presented for the Ninth Annual Conference, Banco Central de Chile, October s:

4 UNDER WHAT CONDITIONS CAN INFLATION TARGETING BE ADOPTED? THE EXPERIENCE OF EMERGING MARKETS Nicoletta Batini International Monetary Fund Douglas Laxton International Monetary Fund Inflation targeting has become an increasingly popular monetary policy strategy, with 21 countries (8 industrial and 13 emerging market) targeting inflation and others considering following in their footsteps. Numerous studies of inflation targeting in industrial countries have been conducted; much less analysis has been done on its effects in emerging markets. 1 This article seeks to fill this void. It looks at the experience of the emerging market countries that have adopted inflation targeting since the late 1990s, focusing on both macroeconomic performance and the potential benefits and costs of inflation targeting adoption. It draws on a new and detailed survey of 31 central banks to support the analysis. Particular attention is paid to the implications for institutional change and to the feasibility and success of inflation targeting when specific conditions, such as central bank independence and lack of fiscal dominance, are initially absent. 1. WHAT IS INFLATION TARGETING AND WHY DOES IT MATTER? It is now widely accepted that the primary role of monetary policy is to maintain price stability. 2 Alan Greenspan, Chairman of the 1. There is a large body of empirical literature on the performance of inflation targeting in industrial countries. More recently, work has been underway to extend this type of analysis to emerging market countries. 2. See Batini, Laxton and Yates (2003) and Pianalto (2005). Monetary Policy under Inflation Targeting, edited by Frederic Mishkin and Klaus Schmidt-Hebbel, Santiago, Chile Central Bank of Chile. 1

5 2 Nicoletta Batini and Douglas Laxton Federal Reserve, has offered an operating definition of price stability that is broadly accepted: Price stability obtains when economic agents no longer take account of the prospective change in the general price level in their economic decisionmaking (Greenspan, 2001). This is often thought to correspond to an annual rate of inflation in the low single digits. 3 Inflation targeting is one of the operational frameworks for monetary policy aimed at attaining price stability. In contrast to alternative strategies notably money or exchange rate targeting, which seek to achieve low and stable inflation by targeting intermediate variables, such as the growth rate of money aggregates or the level of the exchange rate of an anchor currency inflation targeting involves targeting inflation directly. The literature offers several different definitions of inflation targeting. 4 In practice, however, inflation targeting has two main characteristics that distinguish it from other monetary policy strategies. First, the central bank is mandated and commits to a unique numerical target in the form of a level or a range for annual inflation. A single target for inflation emphasizes the fact that price stabilization is the primary focus of the strategy; the numeric specification provides a guide to what the authorities intend as price stability. Second, the inflation forecast over some horizon is the de facto intermediate target of policy. For this reason inflation targeting is sometimes referred to as inflation forecast targeting (Svensson, 1997). Since inflation is partially predetermined in the short term because of existing price and wage contracts or indexation to past inflation, monetary policy can influence only expected future inflation. By altering monetary conditions in response to new information, central banks influence expected inflation and bring it in line over time with the inflation target, which eventually leads actual inflation to become better anchored to the target. The monetary policy strategy followed by 21 countries has these characteristics; these countries are treated here as inflation targeters (table 1). 5 Defining inflation targeting according to these two characteristics makes it clear why, for example, neither the 3. See Bernanke and others (1999); Mishkin and Schmidt-Hebbel (2001); Brook, Karagedikli, and Scrimgeour (2002); Batini (2004); and Burdekin and others (2000). 4. See, among others, Leiderman and Svensson (1995); Mishkin (1999); Bernanke and others (1999). 5. According to these criteria, Chile and Israel are not classified as having adopted inflation targeting until the de-emphasis of their exchange rate targets, in 1999 (in Chile) and 1997 (in Israel).

6 Under What Conditions Can Inflation Targeting Be Adopted? 3 Federal Reserve nor the European Central Bank is considered an inflation targeter: the Federal Reserve lacks a numerical specification for its price stability objective, 6 and the European Central Bank has traditionally given a special status to a second numerical objective, a reference value for the growth of the euroarea M3 broad money aggregate. 7 Table 1. Emerging Market and Industrial Countries that Target Inflation Country Date inflation targeting adopted Current inflation target (percent) Emerging market countries Israel 1997Q2 1 3 Czech Rep. 1998Q1 3 (+/- 1) Korea, Rep. of 1998Q Poland 1999Q1 2.5 (+/- 1) Brazil 1999Q2 4.5 (+/- 2.5) Chile 1999Q3 2 4 Colombia 1999Q3 5 (+/- 0.5) South Africa 2000Q1 3 6 Thailand 2000Q Hungary 2001Q3 3.5 (+/- 1) Mexico 2002Q1 3 (+/-1) Peru 2002Q1 2.5 (+/- 1) Philippines 2002Q1 5 6 Industrial countries New Zealand 1990Q1 1 3 Canada 1991Q1 1 3 United Kingdom 1992Q4 2 Australia 1993Q1 2 3 Sweden 1993Q1 2 (+/- 1) Switzerland 2000Q1 <2 Iceland 2001Q1 2.5 Norway 2001Q1 2.5 Source: International Monetary Fund (IMF) staff calculations. Note: All countries except Mexico publish forecasts of inflation. 6. See Kohn (2003a, and 2003b), Gramlich (2003), and Bernanke and Woodford (2005). 7. See European Central Bank (1999), Solans (2000), and Issing (2000). However, the European Central Bank has recently de-emphasized the weight attached to this reference value, moving toward a pure inflation targeting regime (see European Central Bank, 2003).

7 4 Nicoletta Batini and Douglas Laxton Proponents of inflation targeting argue that it yields a number of benefits relative to other operating strategies (see, for example, Truman, 2003): Inflation targeting can help build credibility and anchor inflation expectations more rapidly and durably. It makes it clear that low inflation is the primary goal of monetary policy and involves greater transparency to compensate for the greater operational freedom that it offers. Inflation targets are also intrinsically clearer and more easily observable and understandable than other targets, since they typically do not change over time and are controllable by monetary means. 8 Inflation targeting can thus help economic agents better understand and evaluate the performance of the central bank, anchoring inflation expectations faster and more permanently than strategies in which the task of the central bank is less clearly defined and more difficult to monitor (IMF, 2005a). Inflation targeting provides more flexibility. Since inflation cannot be controlled instantaneously, the target on inflation is typically interpreted as a medium-term objective. This implies that central banks pursue the inflation target over a certain horizon, by focusing on keeping inflation expectations at the target. 9 Shortterm deviations of inflation from the target are acceptable and do not necessarily translate into losses in credibility. 10 The scope for greater flexibility could reduce variability in the output gap Money targets, for example, have to be reset yearly and are hard to control, because shifts in money demand or in the money multiplier impair the control of the money supply and alter the long-run relationship between money and inflation. Central bank control over exchange rate targets is also limited, because the level of the exchange rate is ultimately determined by the international demand and supply of the domestic currency vis à vis that of the anchor currency. Shifts in sentiment about the domestic currency can thus trigger abrupt changes in its relative value that cannot be offset easily by central bank actions. Many central banks have abandoned money and exchange rate targets on these grounds (see IMF, 2005b). 9. The horizon over which inflation-targeting central banks attempt to stabilize inflation usually varies with the types of shocks that have taken inflation away from the target and with the speed of monetary transmission. See Batini and Nelson (2001) for a discussion of optimal horizons under inflation targeting. 10. Under full credibility, economic agents under inflation targeting pre-emptively adjust their plans in the face of incipient inflationary pressures, so that the central bank has to move interest rates even less and price stabilization comes at even lower output gap variability costs (see, for example, King, 2005). 11. For an explanation of why some inflation targeting alternatives may imply higher output costs, see IMF (2005a).

8 Under What Conditions Can Inflation Targeting Be Adopted? 5 Inflation targeting involves a lower economic cost in the face of monetary policy failures. The output costs of policy failure under some alternative monetary commitments, such as exchange rate pegs, can be very large, usually involving massive reserve losses, high inflation, financial and banking crises, and possibly debt defaults. 12 In contrast, the output costs of failing to meet the inflation target are limited to inflation that is temporarily higher than targeted and growth that is temporarily slower, as interest rates are raised to bring inflation back to target. 13 Critics have argued that inflation targeting has disadvantages and imposes excessive constraints on central banks: Inflation targeting offers too little discretion and thus unnecessarily restrains growth. Since the success of inflation targeting relies on the establishment of a reputational equilibrium by the central bank interacting with agents in the domestic economy, inflation targeting can work effectively only if the central bank acts consistently and convincingly to attain the inflation target. In other words, for inflation targeting to work well, the central bank must demonstrate its commitment to low and stable inflation through tangible actions. In the initial phases of inflation targeting, demonstrating commitment may require an aggressive response to inflationary pressures, which could temporarily reduce output. More generally, inflation targeting constrains discretion inappropriately: it is too confining in terms of an ex ante commitment to a particular inflation number and a particular horizon over which to return inflation to target. 14 By obliging the central bank to hit the target so restrictively, inflation targeting can unnecessarily restrain growth. 15 Inflation targeting cannot anchor expectations, because it offers too much discretion. In contrast to those who worry that inflation targeting may be too restraining, some argue that inflation targeting cannot help build credibility in countries that lack it 12. The experience of Argentina in 2001 is an example of this. 13. The experience of South Africa in late 2002 is one such case. 14. The horizon over which inflation targeting central banks attempt to stabilize inflation at target is not always specified and varies from country to country. See Batini and Nelson (2001) for a discussion of optimal horizons under inflation targeting. 15. See, among others, Rivlin (2002) and Blanchard (2003).

9 6 Nicoletta Batini and Douglas Laxton because it offers excessive discretion over how and when to bring inflation back to target and because targets can be changed. 16 Inflation targeting implies high exchange rate volatility. Because it elevates price stability to the status of the primary goal for the central bank, inflation targeting requires benign neglect of the exchange rate. If this is the case, it could have negative repercussions on exchange rate volatility and growth. Inflation targeting cannot work in countries that do not meet a stringent set of preconditions, making the framework unsuitable for the majority of emerging market economies. Preconditions often considered essential include the technical capability of the central bank to implement inflation targeting, the absence of fiscal dominance, sound financial markets, and an efficient institutional set-up to support and motivate the commitment to low inflation. 2. INFLATION TARGETING: AN ASSESSMENT OF THE IMPACT Empirical studies have focused primarily on the experience of industrial economies, because these countries, many of which adopted inflation targeting in the early 1990s, have longer track records. 17 These studies generally suggest that inflation targeting has been associated with performance improvements, although the evidence is typically insufficient to establish statistical significance of these improvements. No study, however, finds that performance has deteriorated under inflation targeting. The lack of strong evidence from industrial countries may reflect several factors. First, there are only eight inflation targeters to look at and a limited set of nontargeters against which to compare them. Second, the macroeconomic performance of inflation targeters and nontargeters alike improved during the 1990s, for a variety of reasons, including better monetary policy (some aspects of the performance of many nontargeters along some dimensions was improved by preparations for entry into the European Monetary Union, for example). Finally, the fact that most industrial countries entered the 1990s with relatively low and stable inflation makes 16. See, for example, Rich (2000); Genberg (2001); and Kumhof (2002). 17. See, for example, Ball and Sheridan (2003); Levin, Natalucci, and Piger (2003); Truman (2003); and Hyvonen (2005), among others.

10 Under What Conditions Can Inflation Targeting Be Adopted? 7 it more difficult to discern any incremental improvement due to inflation targeting. In many ways, the experience of emerging markets offers a richer set of data for assessing the effects of inflation targeting than that of the industrial countries. The time span covered is short three to seven years but the sample of inflation targeters and suitable comparison countries is considerably larger. Moreover, because many emerging market targeters experienced relatively high levels of inflation and macroeconomic volatility before adopting inflation targeting, it should be easier to discern the effects of inflation targeting. In addition, looking at the experience of emerging markets can provide more useful information about how inflation targeting performs during periods of economic turbulence. While the global inflation and financial market environment has generally been benign in recent years, a number of emerging market inflation targeters were under substantial stress during the course of their inflation targeting regimes (examples include Brazil and other Latin American countries in the early 2000s, South Africa in late 2002, and Hungary and Poland since 2000.) For the analysis that follows, we look at 13 emerging market inflation targeters (shown in table 1). 18 We compare them against the remaining 22 emerging market countries that are in the JP Morgan Emerging Markets Bond Index Index, plus 7 additional countries that are classified similarly. 19 It is useful to begin by reviewing inflation performance of targeters and nontargeters over the past 15 years (figure 1). Inflation in both groups was high in the early to mid-1990s, but as of 1997 it was somewhat higher for the nontargeters, which, as a group had already begun to disinflate by Inflation fell in both targeting and nontargeting countries, but even into 2004 a sizable wedge of roughly 3.5 percentage points remained. Such a wedge reflects the success of most inflation targeters in keeping actual inflation on average close to target, although targets have been missed, especially 18. All of these countries except the Czech Republic and Israel are included in the JP Morgan Emerging Markets Bond Index. 19. These are Botswana, Costa Rica, Ghana, Guatemala, India, Jordan, and Tanzania. We also experimented with excluding these seven countries from the control group. 20. The hypothesis put forth by Ball and Sheridan (2003) that the countries that chose to adopt inflation targeting were those experiencing a transitory increase in inflation is broadly inconsistent with the data when the country sample is extended to include emerging markets.

11 Figure 1. Inflation, a (percent) Average inflation has fallen for both inflation targeters and noninflation targeters over the past 15 years, but more so for inflation targeting countries today Average Annual Inflation Rate Volatility of Inflation Rate b Source: IMF, International Financial Statistics; and IMF Staff Calculations. a. Regional average for emerging market and selected developing countries; average inflation rates above 40 percent and volatilities above 20 percent are not shown, to enable clearer illustration of smaller average inflation differences in the recent past. b. Rolling one year standard deviation of inflation.

12 Under What Conditions Can Inflation Targeting Be Adopted? 9 for disinflating countries, which have tended to miss targets more often and by more than countries with stable inflation targets (table 2; Roger and Stone (2005). To look at the experience in more detail, we compare the performance of inflation targeters before and after adopting inflation targeting relative with the performance of nontargeters. This approach raises the issue of what to use as the break date for nontargeters: while no partitioning of the sample is perfect, we follow Ball and Sheridan (2003) in using the average adoption date for inflation targeters (1999Q4) (dates range from 1997Q2 to 2002Q1). Other partitions of the sample yield similar results, as reported below. As shown in the first panel of table 2, the level and volatility of inflation before inflation targeting was adopted are high and variable for many countries in the sample (Figure 2). The convergence to low and stable inflation following adoption is striking: all countries are clustered in the 1 7 percent range, with a maximum standard deviation of 2 percent. The nontargeters also show improvement along both dimensions, and many succeeded in stabilizing inflation at low levels. As a group, however, their convergence is weaker than the inflation targeters, with many continuing to experience relatively high and volatile inflation. For real output growth and volatility, the pattern is less clear: abstracting from one or two outliers, output volatility is generally lower in the post-adoption period for both groups, with little change in average growth rates. Table 2. Actual Inflation Relative to Target in Selected Groups of Countries Frequency of deviations b Standard deviation (percent) Item from target (RMSE) (percentage points) a Total Below Above All countries Industrial countries Emerging market countries Stable inflation targets Disinflation targets Source: Roger and Stone (2005). a. Figures represent equally weighted averages of statistics for individual countries in relevant groups. Individual country statistics are based on monthly (quarterly for Australia and New Zealand) differences between 12-month inflation rates and centers of target ranges. b. Inflation outcomes relative to edges of target ranges.

13 10 Nicoletta Batini and Douglas Laxton 2.1 Econometric Analysis A more formal statistical analysis, along the lines proposed by Ball and Sheridan (2003), yields similar results. Underlying the analysis is the assumption that some gauge of macroeconomic performance call it X depends partly on a country s own history and partly on some underlying mean value of the variable in question. In the case of the inflation rate for inflation targeters, this mean should, of course, correspond to the inflation target; for other countries, this would simply be the normal level of inflation to which observed inflation reverts. Mathematically, this process can be expressed as follows: X i,t = φ [α T d i,t + α N (1 d i,t ) ] + (1 φ) X i,t 1, (1) where X i,t is the value of a macroeconomic performance indicator X for country i at time t, α T is the mean to which X reverts for inflation targeters, α N is the mean to which X reverts for nontargeters, and d i,t is a variable equal to 1 for targeters and 0 for nontargeters. The parameter φ represents the speed with which X reverts to its groupspecific α: a value of φ equal to 1 means X reverts completely after one period, while a value of φ equal to 0 implies that X depends only on its history, with no tendency to revert to any particular value. The regression used by Ball and Sheridan (2003), and in the results reported in tables 3 6, is a version of equation (1), rewritten in terms of the change in X, appending an error term e, and assuming there are two periods, pre and post adoption: X i,post X i,pre = φα T d i + φα N (1 d i ) φ X i,pre + e i, (2) or, letting a 0 = φα N, a 1 = φ(α T α N ) and b = φ, X i,post X i,pre = a 0 + a 1 d i + bx i,pre + e i. (3) The pre-period for inflation targeters is defined as 1985 until the quarter before the adoption of inflation targeting; the post-period runs from inflation targeting adoption through The break date for nontargeters is 1999Q4, which corresponds to the mean adoption date for emerging-market inflation targeters. Table 3 reports the baseline results obtained from estimating equation (3) on the full sample of 35 emerging market economies of

14 Under What Conditions Can Inflation Targeting Be Adopted? 11 the JP Morgan Emerging Markets Bond Index plus the Czech Republic and Israel (which are inflation targeters but not part of the index) plus 7 countries that are often classified as emerging markets. Included in the set of X variables are CPI inflation, inflation volatility, the volatility of real GDP growth, and the output gap. Table 3. Baseline Results Variables IT dummy variable CPI inflation 4.820** Volatility of CPI inflation 3.638** Volatility of real output growth Volatility of output gap 0.010** Sources: IMF, International Financial Statistics; and IMF staff calculations. Note: One, two, and three asterisks denote statistical significance at the 10, 5, and 1 percent level, respectively. In this framework the relevant parameter for gauging the economic impact of inflation targeting is a 1, the coefficient on the inflation targeting dummy variable. This parameter is reported in tables 3 6 (a o captures whether there has been a generalized improvement in macroeconomic performance across countries independently of differences in monetary regimes). Consider the row on CPI inflation in table 3, showing estimates of equation (3) when X = CPI inflation. There a 1 = -4.8, implying that in countries that have adopted inflation targeting, the reduction in CPI inflation was on average 4.8 percentage points greater than in countries that did not do so. Note that if φ were known to be zero (that is, complete mean reversion), the estimated a 1 would be nothing more than the difference between average X post X pre for inflation targeters and nontargeters; the only advantage of the regression method is that it controls for the initial level of X pre. Furthermore, by focusing on relatively long periods of time, the analysis is largely a comparison of steady states, saying nothing about what happens during the transition to an inflation targeting (or any other) policy framework; doing so would require a very careful control of cyclical conditions to distinguish transition effects from the normal trajectory of the business cycle. The results in table 3 reaffirm the descriptive statistics and the visual impression from the plots: inflation targeting is associated with a significant 4.8 percentage point reduction in average inflation and

15 12 Nicoletta Batini and Douglas Laxton Figure 2. Inflation and Growth Performance a ( ; percent; average on x-axis) Over the page 15 years, there has been a stronger convergence to low and stable inflation for inflation targeters than non-inflation targeters. Growth performance is also more homogenously better for inflation targeters. Inflation Targeters: Annual Inflation Rate Non-inflation Targeters: Annual Inflation Rate Inflation Targeters: Annual Growth Rate Non-inflation Targeters: Annual Growth Rate Source: IMF, International Financial Statistics; OECD Analytical Database; and IMF staff calculations. a. Period average for emerging market and selected developing countries, with pre-inflation targeting average inflation less than 40 percent. b. Rolling one year standard deviation of inflation. a reduction in its standard deviation of 3.6 percentage points relative to other strategies. 21 The standard deviation of real output gap is also slightly lower for the inflation targeters, and the difference between targeters and nontargeters is statistically significant at the 5 percent 21. This finding is at odds with arguments raised by Kumhof (2002), Genberg (2001), and Rich (2000), among others, that inflation targeting is too soft or too discretionary to enable central banks to reduce inflation on a durable basis.

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